5 Recognize revenue when each performance obligation is satisfied Revenue

5 recognize revenue when each performance obligation

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5) Recognize revenue when each performance obligation is satisfied. Revenue Recognition Principle Recognize revenue in the accounting period when the performance obligation is satisfied.
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What is a contract? An agreement between two or more parties that creates enforceable rights or obligations. A contract can be oral, written, or implied from practices. What are the components of a valid contract? The contract has commercial substance . The parties have approved the contract. Identification of the rights of the parties is established. Payments terms are identified. It is probable that the consideration will be collected. Step 1: Identify the contract with the customer Meeting the above criteria makes the contract enforceable. Until performance occurs, the net asset or net liability is not incurred.
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Revenue recognition principles Example On July 4, 2018, Swan Corp sells 6 wood chairs and 1 wood table to Knope Corp on account. Swan Corp sells the chairs for $600 each and the table for $1,500. Knope promises to pay Swan Corp on August 1, 2018. Swan Corp has always collected its accounts from Knope Corp.
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Swan Corp & Knope Corp On July 4, 2018, Swan Corp sells 6 wood chairs and 1 wood table to Knope Corp on account. Swan Corp sells the chairs for $600 each and the table for $1,500. Knope promises to pay Swan Corp on August 1, 2018. Swan Corp has always collected its accounts from Knope Corp. The contract has commercial substance The parties have approved the contract Identification of the rights of the parties is established Payment terms are identified It is probable that the consideration will be collected Yes, cash will be given for furniture Knope agrees to purchase the furniture and Swan agrees to sell it Knope has the right to receive the furniture and Swan has the right to the money Yes, Knope will pay on August 1 Yes, Swan believes that Knope will pay its accounts
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Step 2: Identify the separate performance obligations in the contract What is a performance obligation? A promise to provide a product or service to a customer The promise may be explicit, implicit, or based on a customary business practice Two criteria must be met to constitute a valid performance obligation 1. The company must provide a distinct product or service 2. The products or services are distinct within the contract If products are interdependent, then the products are combined and reported as one performance obligation The objective is to determine whether the nature of a company’s promise is to transfer individual goods and services to the customer or to transfer a combined item
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Swan Corp & Knope Corp On July 4, 2018, Swan Corp sells 6 wood chairs and 1 wood table to Knope Corp on account. Swan Corp sells the chairs for $600 each and the table for $1,500. Knope promises to pay Swan Corp on August 1, 2018. Swan Corp has always collected its accounts from Knope Corp.
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  • Winter '18
  • jane smith

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